Australia’s Expat CGT Trap Explained – The New One Day Rule

Current as at 22 July 2026. Reading time: about 9 minutes.

The problem, in one paragraph

From 1 July 2027, many capital gains made by Australian resident individuals (and trust gains flowing through to individuals) move away from the familiar 50% CGT discount and into a new system built around inflation indexation of your cost base.

Here’s the expat trap: the new law says that if you’re a foreign resident or temporary resident for tax purposes at any time during the relevant testing period, even for one day, indexation is unavailable for that gain. No sliding scale. No credit for the years you did spend here.

Now, that doesn’t mean every concession on the asset vanishes, and for some assets coming home can restart the analysis. But the headline is real, and it’s harsh.

Hang on, what changed?

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 became law on 26 June 2026, just 29 days after hitting Parliament. From 1 July 2027, instead of halving many gains, the system tops up your cost base for inflation and taxes what’s left.

Here’s indexation in thirty seconds, with a deliberately simplified example. Say you bought an investment unit for $500,000 and sell it years later for $800,000. On the raw numbers, that’s a $300,000 gain.

But suppose inflation over your ownership added up to 20%. Indexation lifts your cost base to $600,000, so you’re only taxed on a $200,000 gain. That missing $100,000 wasn’t real profit; it was just your dollars shrinking, and indexation stops you being taxed on it. Lose indexation, and the full $300,000 goes on the table. That’s the benefit the one day rule can take away.

Australia has used indexation before, but this isn’t the old system back with a fresh coat of paint: it arrives with strict residency tests, tricky transition rules, and carve-outs for certain housing investments.

There’s also a new minimum-tax calculation. It doesn’t apply to every seller or every gain. For an individual who is an Australian resident at some time during the income year, it can add extra tax where the ordinary tax on certain gains falls below 30%, worked out at the end, after losses, discounts and concessions, with its own exceptions. Parliament had the option of writing “30%”. It chose a method statement.

And residency isn’t the only condition for indexation. The asset generally needs to have been held for at least 12 months, and not every cost base dollar gets indexed: ownership costs like rates and loan interest miss out entirely.

The one day rule

To get indexation on an asset, you must not be a foreign resident or temporary resident at any time from 1 July 2027 (or if later, the day you acquired the asset) and the day of the CGT event, which for most people means the day that they sell the asset.

One day with the wrong status inside that window and indexation is off the table for that gain. Parliament could have chosen to be fair and reasonable . . . but then again, when did you ever know any government to be reasonable!

Be precise about the trigger: this is a residency test, not a travel test. A month in Bali, by itself, doesn’t do it. A genuine relocation that changes your Australian tax residency can, and exactly when you cross that line is decided by grey, fact-heavy legal tests. The Government has flagged it may consider changes for part-period residents one day. A maybe is not a plan. To learn more about determining your residency status under Australia’s four (yes four) residency tests, read here: Determining Your Australian Tax Residency Status.

Does coming home fix it?

Sometimes. Not automatically.

When you become an Australian tax resident again, certain assets that sat outside Australia’s tax net while you were away (some foreign assets, and shares or ETFs where you paid Australia’s CGT Even I1 exit tax rather than deferring it) can pick up a fresh market-value cost base and a fresh acquisition date on your return, which can start a fresh testing period.

But the reset doesn’t apply to everything. Australian real estate never gets it, because it never left the Australian net. Nor, generally, do investments you kept in the net by deferring the departure tax, and it’s switched off if you’re a temporary resident straight after returning (with a few other exceptions besides).

So “coming home fixes it” is wrong, and “coming home never fixes it” is wrong too. The answer depends on the asset and on what you did when you left.

Less catchy. Much more useful.

It gets worse: the 2027 reset isn’t guaranteed either

You may have heard every asset gets a fresh market-value starting line on 1 July 2027, neatly splitting old gains from new.

Not for everyone.

That reset has conditions, and one of them looks at your residency history: a stint as a foreign or temporary resident during the relevant testing period after 8 May 2012 can knock the reset out, and that period includes years still to come, right up to the sale. It’s also measured from the asset’s acquisition date for tax purposes, which isn’t always the date you’d assume, because the deemed acquisition rules can move it.

If the reset fails, your whole gain shifts onto a different calculation path. Whether that path is better or worse depends entirely on your numbers, but more than likely it will be worse, potentially much worse. The point to take away here though, is that it has to be modelled, not assumed.

Leaving with shares or ETFs? Read this part twice

The moment you stop being an Australian tax resident, the law generally treats you as having sold your shares, ETFs and similar investments at market value that day, and taxes the paper profit. You can instead choose to disregard that pretend sale, which keeps those investments inside Australia’s capital gains tax net until you sell or come home.

Here’s the kicker: there’s no election form. The choice covers all your relevant investments. It’s not a pick-and-mix, and it generally needs to be made by the day you lodge your return for the year you leave, unless the tax office allows more time.

The way you prepare that return is the evidence of your choice, so inadvertently leaving the gains out will generally be taken as choosing the deferral, whether you meant to or not. A decades-long election that causes an asset to continue to be taxed at high rates by Australia (when it would be 100% CGT-free in Australia otherwise) is a poor thing to make by accident.

Model both outcomes, decide deliberately, and document it.

Who’s most exposed

• Expats keeping Australian real estate. The ATO taxes Australian property wherever you live, and it never gets the coming-home reset.
• Investors who defer the departure tax on shares, ETFs or similar assets, keeping them inside Australia’s tax net with the one day rule waiting at the end.
• Anyone holding assets through 30 June 2027 whose residency history knocks out the 2027 reset, shifting the whole gain onto a different path.
• Families with inherited or rolled-over assets, which can arrive carrying an earlier owner’s residency history. Not every inheritance, but the rules can reach back.
• Holders of pre-1985 assets, which generally get dragged into the CGT net for growth after 1 July 2027 under their own transition rule.
• Business owners, whose outcome turns on structure, asset type, the taxable Australian property rules and the small business concessions.

This is not a rule for anyone who travels. It’s a rule for people whose tax residency and asset history put them inside the machinery.

And it continues a pattern. Since 8 May 2012, foreign-resident time has chipped away at the CGT discount, usually by apportionment. For contracts after 30 June 2020, foreign residents generally lost the main residence exemption in all but narrow cases.

Since 1 January 2025, sales of Australian property generally cop 15% withholding unless a clearance certificate or approved variation is in place; it’s a credit against the final bill, not an extra tax, but it’s still your money enjoying an involuntary stay at the ATO.

Now this from the Australian government. That’s not an oversight. That’s a habit.

What to do about it

First, map your assets by type: Australian property, shares and ETFs, foreign assets, business interests, pre-1985 assets. They don’t all follow the same path.

Second, map your exact residency dates since 8 May 2012, because those dates now drive everything.

Third, work out which 2027 transition rules can actually apply to each asset before ordering valuations on autopilot.

Fourth, if a move is on the horizon, model the departure choice on your investments before you fly, and if a return home is possible, check which assets get a fresh start and which don’t.

Fifth, keep every record: costs, valuations, residency evidence, past tax choices. Old paperwork just became valuable, which is tax law’s idea of innovation.

The bottom line

The one day rule is real, but one day overseas is not the test: one day of foreign or temporary resident status is.

Losing indexation doesn’t automatically erase every concession on the asset, and coming home can sometimes start a fresh CGT history for some assets.

What actually happens turns on the asset, its acquisition date, whether the 2027 transition applies, whether the departure tax was paid or deferred, and what happens if you return.

That’s less tidy than the headline. It’s also the difference between useful planning and a very convincing calculation that started from the wrong number.

Want the full story?

This fact sheet is the trailer. The feature-length version, covering the reset mechanics, Sarah’s cautionary tale, the family home rules, the withholding regime and the full playbook, is here: Australia’s New 1-day Rule – CGT Trap for Australian Expats.

And if your future involves a passport and your present involves assets, that’s precisely what we do at Expat Taxes Australia. Plan the move. Model the assets. Then book the flight, and talk to us before you do.

This fact sheet is general information only. It does not take into account your objectives, financial situation or needs, and it is not tax, legal or financial advice. The legislation is newly enacted, generally applies to CGT events from 1 July 2027, and may be affected by future amendments and ATO guidance. Outcomes depend entirely on individual facts, especially tax residency. Before acting, obtain advice from a registered tax agent or appropriately qualified adviser who has reviewed your complete circumstances.

References

1. Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49 of 2026), Schedule 1, https://www.legislation.gov.au/C2026A00049
2. Income Tax Rates Amendment (Tax Reform No. 1) Act 2026 (Act No. 50 of 2026)
3. Explanatory Memorandum to the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 and Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026, via the Parliament of Australia website, https://www.aph.gov.au
4. Income Tax Assessment Act 1997, including sections 103-25 (tax choices), 104-160 and 104-165 (leaving Australia with shares), 110-36 (indexation adjustments), 112-155 to 112-185 (the 2027 transition), 114-10, 114-25 and 114-30 (indexation eligibility and the one day residency rule), 115-30, 115-105 and 115-115 (foreign resident discount rules), 119-5 to 119-15 (minimum tax on capital gains), 768-950 (temporary residents) and 855-45 (becoming a resident again)
5. Australian Taxation Office, “How changing residency affects CGT,” https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/how-changing-residency-affects-cgt
6. Australian Taxation Office, “CGT discount for foreign residents,” https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/cgt-discount-for-foreign-residents
7. Australian Taxation Office, “Foreign resident capital gains withholding,” https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/foreign-residents-and-capital-gains-tax/foreign-resident-capital-gains-withholding/foreign-resident-capital-gains-withholding-overview
8. Expat Taxes Australia, “Australia’s New 1-day Rule – CGT Trap for Australian Expats”